(Bloomberg) -- India's foreign-exchange market is getting roiled after the government told state-run banks to protect their dollar deposits due to a tax dispute.
Banks were told by the authorities to protect their dollar deposits on concern that U.K.-based Cairn Energy Plc will move to seize India's offshore assets after winning an arbitration ruling, according to people with knowledge of the matter.
The move has led to a sudden flood of dollars in India's banking system, with the state banks staying away from receiving the greenback in the forwards market. As a result, the one-month forward premium on the currency pair jumped to as high as 10%, on an annualized basis, on Tuesday, double the average for the year.
“There are no cash receivers in the market, everyone is a payer,” said Anil Kumar Bhansali, a treasurer at Finrex Treasury Advisors. Dollar “cash levels are high. So near-term premiums are also high.”
Lenders aren't committing to U.S. dollar purchases in the forwards market since the guidance last week, the people said, asking not to be identified discussing private deliberations. State-run banks are the usual counterparties for swapping the two currencies.
The surge in the forwards market may have prompted intervention by the Reserve Bank of India, according to traders and analysts. The one-month contract tumbled by 178 basis points on Wednesday to 6.4%, with the RBI likely to have acted to cool the premiums, said Anindya Banerjee, a currency strategist at Kotak Securities.
The central bank didn't reply to an email seeking comment.
Read more: India Joins Venezuela Where Global Firms Seek to Seize Assets
Cairn Energy can push global authorities to impound Indian assets if the South Asian nation declines to honor an arbitration ruling in a $1.2 billion tax dispute, according to a letter the company sent to the Indian High Commission in the U.K. earlier this year.
Cairn Energy had said in March it's considering three options, including talks with the government, preparation for possible enforcement, and a potential to monetize the award, either partially or in full, to a third party. No decision has been taken yet, a spokesman for the company said Tuesday.
The surge in dollar liquidity has been worsened by foreign funds piling into initial public offerings.
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